I have been a CPA for over 30 years focusing on taxation. I have extensive experience with partnerships, real estate and high net worth individuals.
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"I have a total irreverence for anything connected with society except that which makes the roads safer, the beer stronger, the food cheaper and the old men and old women warmer in the winter and happier in the summer." - Brendan Behan
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Is Costco's Jim Sinegal A Hypocrite ?

Although the Wall Street Journal did not, itself, use the “H” word, I think it is fair to say that their editorial attack on Jim Sinegal was charging him with hypocrisy. I’m not a regular WSJ reader, but I happened to pick up a copy Friday morning. I thought the whole thing was rather odd. Costco, it seems, is making a large dividend payment this December to help shareholders beat upcoming tax increases. I’ve been making a list and checking it twice of clients who should be considering a variety of maneuvers because of upcoming tax changes, both certain and uncertain. Accelerating dividends borders on a no brainer. As a matter of fact when I heard that some companies are not accelerating dividends, even ones that will be paid in January, so that they will have a better looking balance sheet on December 31, I thought it was outrageous. It seems darn near irresponsible. That type of behavior should rate a WSJ editorial condemning it. Maybe there was one. Like I said I am not a regular reader.

The problem of course is that Mr. Sinegal supported President Obama.

When President Obama needed a business executive to come to his campaign defense, Jim Sinegal was there. The CostcoCOST +2.00% co-founder, director and former CEO even made a prime-time speech at the Democratic Party convention in Charlotte. So what a surprise this week to see that Mr. Sinegal and the rest of the Costco board voted to give themselves a special dividend to avoid Mr. Obama’s looming tax increase.

There was some accounting commentary in the article that I did not quite get

More striking is that Costco also announced that it will borrow $3.5 billion to finance the special payout. Dividends are typically paid out of earnings, either current or accumulated. But so eager are the Costco executives to get out ahead of the tax man that they’re taking on debt to do so.

Actually in order for someting to be a dividend for income tax purposes it has to come out of “earnings and profits”, a not very well-defined term. Computing a corporations “earnings and profits” for tax purposes can be quite a project. Regardless of that, earnings, accumulated or otherwise, do not perfectly correlate with cash flow so it strikes me that the comment is mixing oranges and apple sauce.

Here is another observation which struck me as rather odd.

Costco’s chief financial officer, Richard Galanti, confirms that every member of the board is also a shareholder.

In context, it almost sounds sinister. So the board sat around and came up with something they thought would be good for the shareholders. It would be so much better if it was a board that had hardly any shareholders so that when somebody suggested that they could save the shareholders some money by accelerating the dividend, they would have been more focused on important things like figuring how that would affect bonus computations.

The bottom line was this. By supporting President Obama, Mr. Sinegal was, in effect, supporting higher taxes and now he supported a tax planning maneuver to avoid some of the tax for himself and his fellow shareholders for the next year or two.

Here we have people at the very top of the top 1% who preach about tax fairness voting to write themselves a huge dividend check to avoid the Obama tax increase they claim it is a public service to impose on middle-class Americans who work for 30 years and finally make $250,000 for a brief window in time.

I have to say I appreciate the Wall Street Journal thinking about the little guys like me, the potential victims of this upcoming onerous tax. I hate to point out that I don’t think it is really that big a deal to the low six figure plodders who get the brief time in the sunlit lands over a quarter million in AGI. You really have to have quite a bit in invest-able assets outside retirement accounts for the new tax on investment income to sting an awful lot. Regardless of that, I think the condemnation of Mr. Sinegal is ridiculous.

Are they really saying that only Republicans should be able to do tax planning ? American business culture (I’m sure it is broader than that, but I’ll stick with what I know) has a tenet that overpaying taxes is irresponsible. That is independent of what you might think taxes should be. Learned Hand said it best:

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

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Sounds like going into Boston, which thankfully I don’t have to do that often. I once concluded that it was literally impossible to get into Boston at 9:00 AM. If I didn’t leave early enough to get in at 8:00. I would get in no earlier than 9:30.

Let’s be candid here. Jim Sinegal and Warren Buffet are ultimate hypocrites. I understand that they are Democrats for purely ideological reasons. And they have their right to be that or whatever they wish to be. Now, when they use their public personas to advocate for a set of measures, defended by their ideology, but then they go on to do exactly the opposite (and in fact the very thing defended by the opposing ideology) then they are hypocrites, plain and simple. It’s like a pro life politician who, after having an affair, asks his lover to abort a fetus conceived as a result of the affair. Democrats would be absolutely justified to be enraged with said politician. Same thing here. When I hear Warren Buffet advocating for paying higher taxes but then he consciously chooses to pay himself with capital gains instead of salary I think he is a hypocrite. Even without any change in the law whatsoever, he could pay higher taxes if he wanted to. But the hypocrisy doesn’t end there. If he was so concerned with giving money to the government one would think he would use existing law to donate the bulk of his fortune to the government. Instead, he gave it to a private foundation TAX FREE. For the sake of political hygiene I would just hope that these pals would be a little bit more honest or stay out of politics altogether. We’ve have enough with dishonest politicians. The last thing we need is politics driven by dishonest businessmen.

I had originally thought I would write about both Buffett and Sinegal in the same piece but on reflection decided not to. Buffett does do a bit of bait and switch in what he proposes. I’ve already written quite a bit about him.

This might not be a perfect analogy but if someone advocated that baseball would be better without the designated hitter rule would you consider them hypocritical if they did not send their pitchers up to bat ?

We don’t need to go to baseball or any other game. We are talking real life here. I think that the Republican male pro life politician that would ask his lover in private to perform an abortion provides a better analogy. This “do what I say but not what I do” is what makes people, at least it makes me, cynical about politics and politicians. We have enough cynics already, we don’t need more. And we certainly we don’t need billionaire cynics. “Taxing the rich” is an ideology embraced by the Democratic Party. It’s part of their class warfare strategy. It’s ideology because it doesn’t solve any problem. You could tax the top 2% at the Clinton rates, still you’d get enough revenue to run the federal government for barely a week. You could confiscate all the wealth of those listed in the Forbes list of the 400 richest Americans, 1.7 trillion I believe, and it would barely cover the deficit of a single Obama fiscal year. The second year would still have a significant deficit. “Taxing the rich” is not the solution to the financial mess. These hypocrites know it. It’s bad enough that they defend this nonsense in public, it’s even worse that they don’t even play by said ideological rules. Voting Democratic and shutting up would be best for the public good.

Note though that the justification for the Bush tax cuts, job creation, failed to materialize. Since the inception of the tax cuts in the 2001 tax year only 1,833,000 jobs have been created. Since the metric the Bush administration held up was 194,000 jobs per MONTH, from a business stand point, the tax cuts are a dismal failure. As for the “drop in the bucket” argument. At this point we should take ANY drop. Since the 2012 deficits is projected to be 1.1 trillion, you are a bit off. Also disingenuous in your rhetoric is the Forbes 400. A better measure is the top 1% and they hold about 37% of this country’s wealth. Given that private and business financial and tangible holdings account for well over 100 trillion dollars. if you were to take less than half wealth of the top 1 %, that would pay ALL of the natonal debt,using about half of Dr. John Rutleges estimation of US wealth. He estimate 188 Trillion. If so, then a mere 20% of the top 1%’s wealth would cover the entire national debt AND we’d be saving about 400 billion each subsequent year in debt service. Which would be nice because I am getting tired of paying off the old S&L crisis.

Now we go to red herrings. The point is that both Jim Sinegal and Warren Buffet are both hypocrites. Period.

As usually happens when discussing with a liberal who doesn’t have any smart point to make, there will always be GW Bush. Now, as to the rest of your BS, good luck convincing any Democratic politician that ALL GW Bush tax cuts should be repealed or that we should confiscate wealth from people, even if it’s 20% of the top 1%. Not to mention that this 1% talk is silly. The combined wealth held by US millionaires in 2010 according to the annual World Wealth Report from Merill Lynch and Capgemini, the U.S. was 11.6 trillion. Take all that, you don’t even cover the public debt. Tell somebody who has worked very hard to become a millionaire that he/she needs to give 200K to uncle Sam to pay his/her “fair share”. The Forbes 400 is pertinent because that’s the league to which these two morons belong. Thanks God we -America- haven’t fell (YET) in Communism’s hands.